SEC Issues Order – Kelmoore Investment Company, Inc.

The SEC recently issued an Order against Kelmoore Investment Company, Inc. (“Kelmoore”) finding that the Palo Alto-based investment adviser inadequately disclosed its advisory fees.  The SEC determined that Kelmoore purported to charge investors a 1% advisory fee, but actually charged clients total fees ranged from 1.5% to over 3% on an annual basis.

From 1999 to 2005, Kelmoore acted as both investment adviser and securities broker for five mutual funds.  Kelmoore’s fund prospectuses and related documents informed investors that it charged an advisory fee totaling 1% of assets under management.  According to the Order, these documents suggested that all of the significant advisory services performed by Kelmoore were covered by the 1% fee.  The Commission’s Order finds that Kelmoore failed to inform investors that the firm internally categorized most services it was providing as brokerage, rather than advisory, and was charging investors substantial brokerage commissions on top of the 1% fee.  According to the Order, had Kelmoore actually calculated the fee in the manner suggested by its written disclosures, the fee would have been as high as 3.63%.  As a result of the misleading disclosures, the SEC found, it would have been difficult for investors to understand the actual amount they were paying for advisory services or make an informed investment decision when comparing the Kelmoore Funds to other mutual funds.

Without admitting or denying the SEC’s findings, Kelmoore agreed to pay a $100,000 penalty and to undertake certain compliance reforms.

The topics of fee reasonableness and the adequacy of fee disclosures is something that we, at Regulatory Compliance, encounter frequently.  Providing disclosure of all potential expenses in a firm’s disclosure documents is extremely important since clients utilize this information in large part to base their decision of which investment advisor to engage for asset management services.  Our experience with some state regulators has been if the management fee and additional transaction costs total 3% and above, the regulators often deem this as excessive within the context of an advisory relationship – even when properly disclosed.